How Do Businesses Avoid Laying Off Workers When Minimum Wages Rise?

HowDo Businesses Avoid Laying Off Workers When Minimum Wages Rise?

Theminimum wage is the lowest age that an employer can pay an employeefor a particular job. This wage is determined by the law of the landor collective bargain agreements that are made by labor unions in acountry. As expected, the minimum wage keeps changing now and thendepending on the economic developments in a country alongside otherfactors such as inflation and currency exchange rates. Raising theminimum wage for its employees means that companies have to spendmore to keep all its employees paid in the correct figure. Critics ofminimum wage raises argue that raising the minimum wage pushescompanies into laying off workers (Schmitt, 2013). However, this isnot always the case. This paper seeks to explore how companies avoidlaying off workers when minimum wages rise.

Accordingto Cooper (2013), raising the minimum wage comes with a myriad ofbenefits for employers, employees and the government. However, itscritics seem to overlook these benefits, only focusing on theexpected job losses that can result from those raises. Currently, theFederal minimum wage stands at $7.25 per hour of work, which is notenough to lift a full-time worker from below the poverty line.Raising this wage is, therefore, good for the economy, economicpolicies and good for the workers. Raising the minimum wage helpsreduce the Federal budget deficit by lowering the expenditure onpublic assistance programs.

Stateswith a higher minimum wage than the Federal figure are observed tohave faster rates of employment growth than other states. Thisimplies that companies have devised means of employing more peopledispute the ever increasing minimum wage. Since the implementation ofminimum wage increments is spread over long durations of time, itproduces a more effective and efficient workforce. It also reducesabsenteeism, lateness, and turnover (Weiss, 2014). Companies avoidlaying off their existing workers since the cost of hiring newworkers is way higher that the cost of paying the existing workersusing the set minimum wage.

Compensationby pricing is another way through which companies avoid laying offworkers when the minimum wage is raised. Raising the market price ofits goods and services will increase the company’s profit margins.The extra income can then be used to pay workers by the new minimumwage (Betcheman, 2015). However, this is not an easy approach to takeespecially for small companies that make low-profit margins. Suchcompanies rely on the tax credit to eliminate the cost of anincreased wage bill. This intervention allows them to avoid layingoff workers.

Somefirms decide to take an entirely different approach as far as theminimum wage of employees is concerned. This trend is mostly observedin the fast food business. Many of such firms pay their employees wayabove the set minimum wage. They use this high pay as an incentive tomotivate their employees to be more productive, which translates tohigher returns for the business (Anyon, 2014). Economists call thisapproach the efficiency wage theory, abbreviated as EWT. Better-paidemployees offer better services and lower turnover as compared toworkers paid the minimum wage. This scenario explains how somecompanies avoid laying off workers by paying them wages that arehigher than the minimum wage while still making profits. In mostcases, as Giuliano (2013) asserts, such firms perform better thattheir peers who pay their employees lower salaries.

Inconclusion, minimum wage increments are a necessary interventionaimed at ensuring that workers in a given industry or locality arefairly remunerated for the services. Loss of employment is one of themost cited drawbacks of minimum wage raises. However, companies applydifferent strategies to avoid laying off workers. These strategiesinclude increasing the prices of their goods and services and usinghigher salaries as an incentive to keep employees motivated andreducing employee turnover.


Anyon,J. (2014). Radicalpossibilities: Public policy, urban education, and a new socialmovement.Routledge.

Betcherman,G. (2015). Labor market regulations: what do we know about theirimpacts in developing countries?. TheWorld Bank Research Observer,30(1),124-153.

Cooper,D. (2013). Raising the federal minimum wage to $10.10 would liftwages for millions and provide a modest economic boost. Washington:Economic Policy Institute.

Giuliano,L. (2013). Minimum wage effects on employment, substitution, and theteenage labor supply: Evidence from personnel data. Journalof Labor Economics,31(1),155-194.

Schmitt,J. (2013). Why does the minimum wage have no discernible effect onemployment? Centerfor Economic and Policy Research,22,1-28.

Weiss,A. (2014). Efficiencywages: Models of unemployment, layoffs, and wage dispersion.Princeton University Press.

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